Two years ago Microsoft was staring down the barrel of disaster. Today it looks stronger than it has in a decade.
In April 2013 IDC research reported second quarter PC sales were 14 percent lower than the year earlier. The firm’s analysts had previously forecasted falling sales. They got that much right, but their earlier forecast said PC sales would drop just seven percent.
Something happened between the forecast and the quarter: Microsoft launched a new version of Windows.
Windows 8 failed to revive hardware sales
Until 2013 the usual pattern was for PC sales to tick up as users upgraded their hardware when a new version of Windows arrived.
Instead, observers saw Windows 8 as one reason for the accelerated drop in PC sales.
Windows 8 was a flop. More than a flop. It hurt the entire PC industry.
Microsoft had banked on PC users shifting away from keyboards to tablet-like touch screens.
Fear of tablets
In 2013 this made sense. Tablet sales were growing fast at a time PC sales were falling. It looked as if PCs would be eclipsed by a newer, lighter in both senses, style of computer.
Microsoft came up with a version of Windows that included a radical new user interface optimised for fingers, not keyboards and mice.
Along the way ditched the familiar start button and confused everyone with constant yet inconsistent switching between a familiar Windows desktop and the tablet-like Metro interface.
Things got even more confusing when Microsoft had to change the name of Metro to Modern.
Little love for Windows 8
Windows 8 had a tough time from reviewers. That was nothing compared to the market reaction.
Customers hated Windows 8. Or at least vocal customers did. Word quickly got around that this was another version of Windows to skip, like Windows Vista and Windows Me.
If anything computer makers were less happy with Microsoft. Not only had Microsoft put a brake on sales with an unpopular Windows release but it had also recently entered the hardware market with the first generation of Surface tablets.
No margin boost from touch screen hardware
There was something else. Microsoft made Windows 8 for touch screens. In theory the extra hardware needed would put more pressure on customers to upgrade to get all the promised benefits of the new technology.
At the same time it pushed up the average selling price of a laptop.
This might be good news for computer makers if it meant better margins. Typically a hardware maker earns a single digit profit from laptop sales. Higher prices for adding touch screens might improve margins if enough consumers considered touch to be worth a premium price.
They didn’t. Instead the market was confused about what to buy. When that happens customers often keep their money in their pockets until clear patterns emerge.
Users voted with their wallets
And anyway higher prices for touch screens meant many users opted to stay with their existing hardware for longer than they otherwise might have done.
It is possible Microsoft’s misjudged move to touch screen technology paved the way for a surge in Apple Mac sales.
Apple’s third quarter of the 2015 year shows 33 percent year-on-year growth in Mac sales. In that quarter Mac sales were up nine percent while overall PC sales fell 12 percent.
This didn’t happen in a vacuum. Apple makes exceedingly good computers. There’s a halo effect from iPhone sales and let’s not underestimate the brand strength.
Microsoft’s loss was Apple’s gain
Yet despite all this, logic says that Apple has wooed many customers away from Windows. This trend stepped up a gear soon after Microsoft launched Windows 8.
Today Apple’s market share by unit is about 50 percent higher than it was before Windows 8 launched. The company’s share of PC sales revenue and profit is also much higher.
Slow selling Microsoft Surface
Surface sales got off to a slow start.
During the first quarter of 2013 Microsoft sold 900,000 Surface tablets. Apple sold 20 million iPads during the same period and Samsung shifted 9 million Android tablets.
The first Surface models came with a cut-down version of Windows known as Windows RT. Rationally or otherwise the market never warmed to RT. 
Microsoft could have done better. It had a long head start. Remember it was Bill Gates, not Steve Jobs, who first pushed the idea of tablet computers.
Remember Slate computers?
Microsoft had been pushing slate-like devices for a decade before the iPad arrived. Sure, those stylus controlled devices were different, heavier and more sluggish than iPads, but the idea was a good one.
To be fair to Microsoft, Surface devices are excellent.  If you use Windows, have an investment in Microsoft products and services, they are a great, albeit expensive choice.
The Surface brand has a fiercely loyal following. Yet, I’ll stick my neck out and say if you should look around at this week’s Microsoft Ignite event, you’ll see almost as many Apple logos as Surfaces.
And then there was Nokia…
Microsoft’s other touch screen blunder was buying Nokia’s phone business.
When Microsoft acquired the Nokia brand in 2013 it was clear what had been mainly a software company was now up to its neck in a strategy revolving around hardware.
Microsoft spun the acquisition as a triumph. That’s not how it looked to anyone outside the Microsoft bubble.
Buying a failed business
Yet here was a phone maker that had, in effect, picked a failed strategy. Perhaps Nokia’s biggest failure was choosing Microsoft’s phone operating system.
Windows 8, Surface hardware, the Nokia acquistion were all strategic moves made when Steve Ballmer was Microsoft CEO.
History paints Ballmer as a general who, having learned how to fight in the last war, was leading his troops into a new style of conflict without any maps.
There’s something in that, but it isn’t the whole story. A lot of people misread the signs at that time.
If we extend the metaphor, Ballmer had the wit to go out and buy his troops modern weapons. He got Microsoft into the tablet and smartphone business at a time most people saw these technologies as the logical successors to personal computers.
Far from simple
Some people still see them that way. I don’t. Things aren’t that simple.
Three years ago the PC market peaked in unit sales and revenues. They took 30 years to reach their peak. The tablet market, at least the first wave of the tablet market, peaked in three years.
At the time of writing smartphone sales still haven’t peaked. Maybe they have and we don’t know it yet.
Either way they will peak soon.
From that point on the hardware market — PCs, tablets and phones — will be a mature market. Sales may grow in line with overall economic growth. There may be excitment as new geographic and submarkets open up. But from a big picture point of view the glory days are over.
Where things go next is interesting because as computer hardware markets mature, the focus switches from selling devices to software and services. That’s where Microsoft has always been strong.
If you like Ballmer sent his troops to fight the last war, when, in fact, they were always better equipped to fight the next one.
Ballmer’s value destruction
On one level Ballmer’s investments in Nokia, Surface and touch screen Windows were disastrous. They may have cost the company more than US$10 billion.
Yet those moves helped push Microsoft to the position it is in today. The company is now better positioned to dominate the markets supplying software and services to every type of computing device.
It won’t be easy. Apart from anything else, Microsoft is entering uncharted waters as far as making money is concerned.
Functional, free software
Customers are used to getting a lot of software functionality for free. Microsoft’s biggest rival, Google, operates a free model with customers trading their privacy for software or having to accept advertising as part of the deal.
For now Microsoft’s strategy is to offer some free services and free tiers of products like OneDrive and Office. Customers pay more to get more or a better experience. For the most part Microsoft is generous to consumers while recovering revenue from business users.
Microsoft remains a solid business. It is still the market leader in many areas. The company has remarkable resilience, there can’t be many businesses able to waste $10 billion or so chasing a dead end strategy and still come up smelling of roses.
- Surprising given the affordable price and the popularity of Microsoft Office which was included as part of the deal. ↩
- If I didn’t need a solid, laptop-style keyboard for touch typing I’d be happy to use a Surface instead of a MacBook as my everyday computer. ↩
- I don’t buy that theory. Nokia would have been even more screwed if it had gone with Android. ↩